Hedge funds raised bullish gold wagers to the highest in eight weeks as signs of stronger Chinese demand drove prices to the longest rally since August. Goldman Sachs Group Inc. says the gains will be short-lived.

Gold analysts are the most bullish in three weeks after the Federal Reserve’s surprise decision not to taper stimulus increased demand for bullion as a hedge against accelerating inflation and currency debasement.

Gold plunged to a 34-month low, set for a record quarterly drop, as improving U.S. economic data strengthened the case for the Federal Reserve to reduce stimulus. Silver futures fell to the lowest since August 2010.

Hedge funds cut positions on a gold rally by the most since February after the Federal Reserve laid out plans for reducing stimulus and this year’s drop in the value of exchange-traded products extended to $55 billion.

Gold fell below $1,300 an ounce to the lowest in more than 2 1/2 years in New York, exceeding April’s drop into a bear market, after Federal Reserve Chairman Ben S. Bernanke said stimulus may be reduced later this year.

The turn in the gold price cycle is accelerating after a 12-year rally as the recovery in the U.S. economy gains momentum, according to Goldman Sachs Group Inc., which reduced forecasts for the metal through 2014.